US consumer spending up 0.4 per cent in January as Americans faced high heating bills

WASHINGTON – Americans spent more in January, but the increase came from a surge in spending on heating bills during the harsh winter. Spending in areas such as autos and clothing declined.

Spending rose 0.4 per cent in January after a 0.1 per cent gain in December the Commerce Department said Monday. The December figure was revised down from a 0.4 per cent increase.

Income grew 0.3 per cent in January after no increase in December.

The overall spending increase in January reflected a 0.8 per cent jump in spending on services, the effect of higher heating bills. It was the biggest increase in spending on services since October 2001.

Spending on durable goods such as autos fell 0.3 per cent. And spending on nondurable goods, covering things like clothing and food, dropped 0.7 per cent.

“Spending looks great but is not,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics. Without an 11.3 per cent surge in spending on utility bills, Shepherdson said consumer spending would have been close to flat.

Consumer spending is closely watched because it drives about 70 per cent of economic activity. On Friday, the government said the economy grew at a 2.4 per cent annual rate in the October-December quarter, down sharply from an initial estimate of a 3.2 per cent rate.

Analysts said the drop in spending on goods in January as bad weather kept people from shopping might also have held down spending in February.

“Given that the weather was unusually severe in February too, the outlook is more uncertain than usual,” said Paul Dales, senior U.S. economist at Capital Economics.

The 0.3 per cent rise in income was partly influenced by temporary factors, such as the start of health care coverage in several areas under the Affordable Care Act. But the expiration of benefits for some long-term unemployed people acted to reduce income. Without those special factors, income would have risen 0.2 per cent in January, the government said.

Inflation as measured by a price gauge tied to consumer spending remained moderate. It rose 0.1 per cent in January and has risen 1.2 per cent over the past 12 months, well below the Federal Reserve’s 2 per cent target.

Most of the revision in overall economic growth in the fourth quarter reflected a lower estimate for consumer spending, which grew at an annual rate of 2.6 per cent during the quarter. That was down from an initial estimate of a 3.3 per cent annual rate.

Part of the downward revision in spending reflected lower sales of autos and lower spending for non-durable goods than first thought. Analysts said the severe weather that hit much of the country was to blame for those reductions. Most think the harsh weather will also limit growth in the current January-March quarter.

Economists generally think overall growth this quarter will dip to an annual rate of around 2 per cent. But they still foresee a rebound beginning in the April-June quarter and for the rest of the year. They expect that contained employment gains and a lessening of last year’s drag of higher taxes and federal spending cuts will support growth this year.

Many forecast that the overall economy will grow at a solid 3 per cent annual rate this year, up from 1.9 per cent growth in the gross domestic product last year. That would be the best performance since the recession ended nearly five years ago.

But before growth rebounds, the economy must endure a soft patch caused by winter weather and decisions by companies to work down a buildup in their stockpiles before they step up spending again.

Once warmer weather arrives, many analysts expect a burst of spending caused by pent-up demand from consumers who put off spending for big-ticket items like autos during winter.

Federal Reserve Chair Janet Yellen testified to Congress last week that the Fed still expects the economy to strengthen this year. But she told the Senate Banking Committee that the Fed will be studying the data to make sure the slowdown is just a temporary weather phenomenon.

The Fed is gradually reducing its monthly bond purchases, which have been intended to keep long-term loan rates low to encourage spending and growth.